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China Launches War On Yuan Bears With 1000+ pip Fixing Gap Vs Estimates

China Launches War On Yuan Bears With 1000+ pip Fixing Gap Vs Estimates

Earlier, when discussing China’s recent surge in FX outflows, we said that while promoting growth remains a priority for Beijing, the PBOC is expected to follow up with more measures to slow the depreciation trend in the yuan,  such as more significant countercyclical factors in the daily CNY fixing, cutting FX deposit reserve requirement ratio, and/or adding FX forward sales reserve requirement.

Of course, China can just keep doing what it has been doing now for several weeks, but never to the extent it just moments ago when the PBOC delivered its strongest ever pushback against a weaker yuan via its daily reference rate, as it sought to restore some confidence in a Chinese market that has seen an unprecedented collapse in confidence – not to mention prices – spooked by disappointing (and disappearing) data and heightened credit risks.

The Chinese central bank set its yuan fixing at 7.2006 per dollar compared to the average estimate of 7.3047. The gap – an unprecedented 1,041 pips – was the largest gap to estimates since the poll was initiated in 2018.

The offshore yuan extended gains to 0.2% after the fixing…

… which was also set at a stronger level to the previous day for the first time in six sessions…

“At this juncture, the PBOC might want to put a stop in the trend,” of a weaker yuan, said Kiyong Seong, lead Asia macro strategist for Societe Generale SA. “On a temporary basis, it’s possible the actions by policy makers can discourage more bearish betting.”

As discussed earlier today, as part of China’s escalating support for the embattled yuan in recent days – which has so far failed to yield any notable results with the currency hitting an all time low yesterday…

… Beijing told state-owned banks to step up intervention, while the central bank said it will resolutely prevent excessive adjustment in the yuan.

That “request” came as the yuan touched on 7.35 per dollar, a level that Beijing has been paying close attention to as a line in the sand. The yuan traded around the 7.29 level offshore on Friday.

“Going ahead, further measures such as potential cut to the foreign-exchange reserve-requirement ratio following the PBOC’s pledge to prevent overshoooting may prompt yuan bears to trim their short position,” said Ken Cheung, FX strategist at Mizuho.

Still, as Bloomberg notes, the problem for China is that yuan bears had latched on to the fact that the fixing itself had been progressively weaker over the past weeks, regardless of its gap to estimates, and taken that as a sign the PBOC is ok with a slow depreciation in the currency. Of course, dismal economic data, plunging housing prices coupled with a spreading crisis in the property and shadow banking sector, and the biggest FX outflow in one year, have also hammered sentiment and led to further currency selling.

“The PBOC has persisted in setting the fixings much stronger than expected, with the largest counter-cyclical factor since late last year, but they have been allowing the yuan to adjust,” Australia & New Zealand Banking Group strategists including Mahjabeen Zaman wrote in a note Thursday. “This is a sign that the authorities are prioritizing the need to support growth at the expense of the currency.”

China’s currency has tumbled over 5% against the dollar this year amid a disappointing economic recovery and broad dollar strength. Adding insult to injury, while traditionally an FX decline of this magnitude would boost exports, those have also languished and in July plunged the most since the covid crash.

Meanwhile, an unexpected PBOC rate cut earlier this week to re-ignite growth have just intensified the focus on the widening US-China yield gap and added more pressure to the yuan.

“The authorities are preparing to draw a line in the sand and defend the currency from further weakness,” said Khoon Goh, head of Asia research at Australian & New Zealand Banking Group in Singapore. “But for a more sustained rebound in the yuan, we really need to see US 10-year bond yields come down from current high levels.”

So the Fed never counted on Biden’s Dept of Commerce, Labor, Census Bureau, etc, coming up with the most creative seasonal adjustments in history and making the economy “grow” at 5.8%, so EMs (and DMs) are about to croak

Time for an emergency CB session at Centralbahnplatz 2

— zerohedge (@zerohedge) August 17, 2023

And that, as we explained yesterday, is unlikely to happen as long as the Biden admin keeps putting seasonally adjusted lipstick on the pig that is the US economy at least until the Nov 2024 election. So to all the EMs and DMs out there, condolences: your economies are about to get it because Biden has to get reelected.

Tyler Durden
Thu, 08/17/2023 – 23:20

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